Dormant assets scheme: HM Treasury and DCMS consult on expansion

HM Treasury and the Department for Digital, Culture, Media and Sport (DCMS) have jointly published a consultation paper on expanding the dormant assets scheme established under the Dormant Bank and Building Society Accounts Act 2008. The consultation follows an industryled report by four business leaders which made a series of recommendations on how to broaden the current scheme beyond bank and building society accounts.

The government is consulting on expanding the scheme to the following sectors:

  • insurance and pensions;
  • investment and wealth management; and
  • securities.

Given the significant changes to the pensions landscape in recent years and the government's commitment to pensions dashboards, it is minded to exclude pensions from an expanded dormant assets scheme at this stage. However, it encourages views on this as part of the consultation process.

Assets proposed to be within the scope of the expansion include:

  • dormant insurance policy proceeds;
  • dormant share proceeds;
  • dormant unit proceeds;
  • dormant distributions and proceeds from investment assets; and
  • other dormant security distributions.

Customers will always be able to reclaim the same amount they would have had if their assets were never transferred, as they do in the current scheme, and companies would continue to participate on a voluntary basis.

Under the scheme, funds are held by Reclaim Fund Ltd (RFL). RFL is authorised and regulated by the Financial Conduct Authority (FCA), and holds sufficient money to cover any reclaims while distributing the surplus to The National Lottery Community Fund for social or environmental initiatives across the UK.

There are currently over 30 participating firms listed on the RFL website.

The consultation ends on 16 April 2020.

Updating LIBOR and SMCR references: PRA PS3/20

Following its occasional consultation paper, CP25/19, the Prudential Regulation Authority (PRA) has published a policy statement, PS3/20, setting out its response to the feedback received on some of its proposals. The PRA confirms its final policy relating to chapters 2 (LIBOR references) and 3 (Senior Managers & Certification Regime (SMCR) references) of CP13/19. It received no responses to these chapters and has made no changes to the draft policy. The PRA has consequently made the following changes with immediate effect:

The PRA will publish feedback and final policy for chapter 5 of CP25/19, which relates to retirement interest-only mortgages, alongside the final policy for CP21/19 (Credit risk: Probability of Default and Loss Given Default estimation) at a later date. This is because both consultation papers proposed changes to the PRA's SS on internal ratings-based approaches (SS11/13).


UK government policy paper on approach to UK-EU future relationship negotiations

The UK government has published a policy paper on its approach to negotiations on the future UK-EU relationship. In the paper, the government sets out its proposals for the contents and structure of a comprehensive free trade agreement (CFTA) between the UK and the EU. In the area of financial services, the agreement states that:

  • The agreement should promote financial stability, market integrity, and investor and consumer protection for financial services, providing a predictable, transparent, and business-friendly environment for cross-border financial services business.
  • The agreement should include legally binding obligations on market access and fair competition, in line with recent CETA precedent.
  • The agreement should also build on recent precedent, such as the EU-Japan EPA and international best practice, by establishing regulatory cooperation arrangements that maintain trust and understanding between our autonomous systems of regulation as they evolve. This could include appropriate consultation and structured processes for the withdrawal of equivalence findings, to facilitate the enduring confidence which underpins trade in financial services.
  • The UK and the EU have committed to carrying out unilateral equivalence assessments for financial services, distinct from the CFTA. The fact that the UK leaves the EU with the same rules provides a strong basis for concluding comprehensive equivalence.

More generally, the government states that it will not agree to any obligations for the UK's laws to be aligned with the EU's or for the EU's institutions to have any jurisdiction in the UK. It also reiterates that it will not apply to extend the transition period.

Council of the EU Decision on UK-EU future relationship negotiations

The Council of the EU has adopted a Decision authorising the opening of negotiations on the future UK-EU relationship. An Annex published alongside the Decision contains negotiating directives setting the scope of the negotiating mandate and constitutes a finalised mandate to the European Commission to be the EU's official negotiator. In the financial services section, the EU mandate states:

  • The envisaged partnership should reaffirm the parties' commitment to preserving financial stability, market integrity, investor and consumer protection and fair competition, while respecting the parties' regulatory and decision-making autonomy, and their ability to take equivalence decisions in their own interest. This is without prejudice to the parties' ability to adopt or maintain any measure for prudential reasons. The key instrument the parties will use to regulate interactions between their financial systems will be their respective unilateral equivalence frameworks.
  • The cooperation on financial services should establish close and appropriately structured voluntary cooperation on regulatory and supervisory matters, including in international bodies. This cooperation should preserve the EU's regulatory and supervisory autonomy. It should allow for informal exchange of information and bilateral discussions on regulatory initiatives and other issues of interest. It should ensure, where possible, appropriate transparency and stability of the cooperation.
  • Equivalence mechanisms and decisions remain defined and implemented on a unilateral basis by the EU. In this framework, transparency and appropriate consultation between the EU and the UK in relation to equivalence decisions is important, while preserving the EU's regulatory and supervisory autonomy.

Separately, Michel Barnier, the EU's chief negotiator on its future relationship with the UK, has given a speech on cooperation in the age of Brexit. In his speech, Mr Barnier states that the EU will make equivalence determinations when it is in the interest of the EU, its financial stability, its investors and its consumers. He warns that equivalence decisions will never be global or permanent and that they are, and will remain, unilateral decisions. He rejects the idea that these determinations will be subject to joint management with the UK.

Draft Over the Counter Derivatives, Central Counterparties and Trade Repositories (Amendment etc and Transitional Provision) (EU Exit) Regulations 2020

HM Treasury has published a draft version of the Over the Counter Derivatives, Central Counterparties and Trade Repositories (Amendment etc and Transitional Provision) (EU Exit) Regulations 2020 and an accompanying context note. The draft regulation amends retained EU law in the European Market Infrastructure Regulation (EMIR) to take into account of EMIR 2.2, and related UK legislation, to ensure that the UK continues to have an effective regulatory framework for third country central counterparties (CCPs).

The draft Regulations are still in development. The drafting approach, and other technical aspects, may change before the final version is laid before Parliament, which HM Treasury intends to do in spring 2020.

Hogan Lovells Brexit resources

Given the moving Brexit target at the moment we recommend that for an up-to-date take on Brexit impact please try the Hogan Lovells Brexit Hub, an open resource online.

Hogan Lovells Brexit Hub


Banking and Finance

Access to Banking Standard: LSB report on 2019

Following its first review in 2018, the Lending Standards Board (LSB) has published a second summary report on banks' application of the Access to Banking Standard.

The Access to Banking Standard aims to help minimise the impact of bank branch closures on customers and local communities. It is designed to ensure that customers affected by branch closures receive sufficient communication and clarity on the reasons for the closure and adequate support in accessing alternative banking services.

The Standard, overseen by the LSB, applies once the decision to close a branch has been taken. Therefore, the role of the LSB does not extend to approving or commenting on the banks' decision to close branches.

This latest review assessed proposals by seven firms to close 480 branches in 2018 and 513 branches in 2019. It included an assessment of the process for identifying impacted customers and dealing with potentially vulnerable customers, the adequacy of communications and notices prior to and during the closure process, and the availability of impact assessments for customers.

The LSB observed clear improvements made by firms since the first review in 2018.

However, areas requiring improvement include:

  • the need for a more proactive strategy for engaging with potentially vulnerable customers;
  • enhancing the level of information available post-announcement and post-closure to continually assist customers; and
  • the availability of the impact assessment for consumers.

The LSB will continue to monitor activity in this area, working with firms and carrying out further independent assurance to ensure all actions are completed to a satisfactory level.

To assist with sharing good practice, the LSB intends to develop industry guidance relating to providing enhanced levels of information to customers and encouraging further improvements in complying with the Access to Banking Standard. It hopes to publish the guidance in spring 2020.

CMU High-Level Forum interim report

The High-Level Forum on Capital Markets Union (CMU) has published an interim report on the way forward for the CMU. The Forum calls for strong and immediate political support and coordination among all EU institutions to push forward bold reforms so that the CMU can deliver on its promises. The interim report will feed into the Forum's recommendations that will form part of its final report in May 2020.

The Forum clarifies that the views expressed in the report are those of its members and do not constitute the views of the Commission or its services, nor do they provide any indication of the Commission's policy approach to CMU.

Macro-prudential policy implications of level 2 and 3 financial instruments for accounting purposes: ESRB report

The European Systemic Risk Board (ESRB) has published a report on the macro-prudential implications of financial instruments that are measured at fair value and classified as level 2 and 3 instruments for accounting purposes.

The report identifies three main areas where financial instruments measured at fair value can affect financial stability and have a macro-prudential impact:

  • inaccurate valuation of financial instruments;
  • possible volatility and illiquidity in times of stress (particularly for financial instruments classified in levels 2 and 3); and
  • inadequate reflection of underlying risks in the prudential framework.

Available data also reveals that the relative importance of financial instruments classified in level 2 and 3 varies significantly across banks and that there is substantial heterogeneity in the underlying portfolios, instruments and models associated with those instruments. With that in mind, the ESRG concludes that policy responses should focus on:

  • increasing transparency through improved disclosure;
  • making full use of the mandates assigned to auditors, accounting enforcers and microprudential supervisors; and
  • promptly incorporating the Fundamental Review of the Trading Book into the EU's prudential framework.

Consumer Finance

Guide to help creditors support customers with mental health and debt problems

The Money and Mental Health Policy Institute and the Money Advice Trust have launched a guide to help creditors support customers affected by debt and mental health problems.

The guide is aimed primarily at staff working in debt collection departments in firms across all essential services sectors. It contains detailed information about how specific mental health conditions may affect a customer's ability to manage and earn money. The guide also offers practical advice to firms on improving their support to customers affected by these issues.

The guide was developed with support from UK Finance.

Securities and Markets

Notifying short positions: FCA amends process

The FCA has updated its webpage on the notification and disclosure of net short positions under the Short Selling Regulation to announce an amended process for submitting notifications.

To be able to submit a short selling notification to the FCA on behalf of a position holder (whether a firm or an individual), the person making the notification (the reporting person) must be registered with the FCA. Registration is done by creating an Electronic Submission System (ESS) account and then submitting a Short Selling Regulation registration form.

The FCA has published a user guide for the ESS and the Short Selling Regulation, which sets out how to access the ESS and how to submit short selling notifications.

Sterling LIBOR transition: BoE publications

The Bank of England (BoE) has published the following documents to further support risk-free rate transition:

  • a speech, Turbo-charging sterling LIBOR transition: why 2020 is the year for action - and what the BoE is doing to help;
  • a discussion paper, Supporting Risk-Free Rate transition through the provision of compounded SONIA – responses to be submitted by 9 April 2020; and
  • a market notice, The Bank's risk management approach to collateral referencing LIBOR for use in the Sterling Monetary Framework, detailing haircut add-ons. From October 2020, BoE will increase haircuts progressively on LIBOR linked collateral that it lends against with haircuts scheduled to reach 100% at the end of 2021. Any LIBOR linked collateral issued after October 2020 will be ineligible for use at the BoE.

Transfer of EONIA's liquidity to €STR: ECB working group report

The European Central Bank (ECB) working group on euro risk-free rates has published a report on the transfer of liquidity from EONIA's cash and derivative products to €STR.

This report supplements the working group's "Report on the impact of the transition from EONIA to the €STR on cash and derivatives products", published in August 2019, and aims to:

  • support the smooth transition from EONIA to the new €STR, taking advantage of the liquidity already present in the EONIA cash and derivatives market;
  • provide guidance on how to ensure a liquid €STR cash and derivatives products market; and
  • provide clarifications around specific topics that have been discussed since publication of the above report.

Central clearing risks: ECB speech on enhancing coordination

The ECB has published a speech by Fabio Panetta, ECB Executive Board Member, on stepping up coordination on central clearing risks. Mr Panetta states that critical gaps remain in both cross-border cooperative arrangements for global central counterparties (CCPs) and coordination within the central clearing community. There should be no further delay in bringing cooperative oversight, crisis management and resolution planning in line with international standards. This is particularly important for the ECB, given its dual role as banking supervisor and central bank of issue for the euro. Mr Panetta suggests a range of potential actions.

SFTR reporting: ICMA guide

The International Capital Market Association (ICMA) has published a guide to reporting repo transactions under the Regulation on reporting and transparency of securities financing transactions (SFTR).

The new reporting regime introduced by SFTR will start its phased implementation in April 2020 and will require detailed reporting by EU-incorporated or located entities of all securities financing transactions (including repo and reverse repo) to authorised trade repositories.

The ICMA guide aims to help members interpret the regulatory reporting framework specified by ESMA and sets out best practice recommendations to provide additional clarity and address ambiguities in the official guidance. It is supplemented by a suite of sample reports and an overview of repo life-cycle event reporting.

The guide will continue to evolve; therefore users should download the latest version from ICMA's SFTR webpage.

EMIR reporting: industry best practices matrix

ISDA has published an industry best practices matrix for reporting under EMIR. The EMIR best practices are available to all market participants to access and implement.

ISDA explains that this is a cross-trade association initiative developed jointly by the European Fund and Asset Management Association, the European Venues and Intermediaries Association, the Futures Industry Association, the German Investment Funds Association (BVI), the Global Foreign Exchange Division, ISDA and the Investment Association.

FICC Markets Standards Board Annual Report 2019

The Fixed Income, Currencies and Commodities (FICC) Markets Standards Board (FMSB) has published its annual report for 2019 which gives a summary of progress and activities in 2019. The report also outlines the FMSB's areas of focus and planned work for 2020.


PEPP Regulation: EIOPA consults on draft ITS on supervisory reporting and cooperation

The European Insurance and Occupational Pensions Authority (EIOPA) has published a consultation paper on draft implementing technical standards (ITS) relating to the format of supervisory reporting and the cooperation and exchange of information between competent authorities and EIOPA under the Regulation on a pan-European personal pension product (PEPP Regulation). The text of the draft ITS is set out in the paper. The annexes to the ITS include reporting templates, and EIOPA has also made draft annotated templates available in an online format. An impact assessment of the draft ITS on reporting for PEPP providers is set out in Annex I to the paper.

The proposals specify the annual supervisory reporting requirements on PEPP and formalise the notifications required by the PEPP Regulation to facilitate efficient processes in the cooperation between competent authorities and EIOPA.

The consultation ends on 20 May 2020. EIOPA is required to submit the draft ITS to the Commission by 15 August 2020.

IAIS insurance capital standard: EIOPA statement

EIOPA has published a statement by Gabriel Bernardino, EIOPA Chair, on the global insurance capital standard (ICS) being developed by the International Association of Insurance Supervisors (IAIS).

Mr Bernardino explains that EIOPA's priority at the moment is reviewing the Solvency II Directive. However, in parallel it remains strongly committed to developing the ICS. EIOPA will continue working with its international peers to ensure that the final ICS standard is based on a market-adjusted valuation, that capital requirements are sufficiently robust and risk-sensitive, and that internal models are allowed to be used under sound and prudent criteria. In these circumstances, EU legislators should be happy to endorse the ICS and make any necessary adjustments to the Solvency II Directive regime to ensure that European internationally-active insurance groups (IAIGs) are required to use only one capital framework that meets the IAIS' standards.

From EIOPA's perspective, the main objective is the setting up of one single risk-based ICS that would promote a level playing field between IAIGs headquartered in different parts of the world, reducing arbitrage opportunities and supporting financial stability.

While recognising that only the future implementation of the ICS throughout the world will bring the necessary convergence to the supervision of IAIGs, Mr Bernardino says it could be possible to imagine a situation where a different capital calculation methodology would deliver substantially the same outcomes as the ICS. The recognition of this comparability could help the path towards convergence.

It is in this spirit that EIOPA is approaching the assessment of comparable outcomes of the aggregated method (AM) currently under development by the US supervisors. The assessment needs to be based on data showing that the AM and the ICS produce similar results and trigger similar supervisory action.

Information collected during the five-year monitoring period of ICS version 2.0 will, by and large, determine the final design of the ICS and the factual basis for the comparability assessment. As a result, all IAIGs, especially those in the EU, are strongly encouraged to participate.

IAIS insurance capital standard: monitoring period

The IAIS has published a statement on the five-year monitoring period for version 2.0 of the ICS. During the monitoring period, the ICS will be used for confidential reporting and discussion among supervisors in supervisory colleges.

The IAIS does not have legal power to directly mandate IAIGs to report ICS results during the monitoring period. However, IAIS member supervisors have collectively agreed to make participation as large as possible across different jurisdictions and business models to ensure the ICS captures risk appropriately.

The purpose of the monitoring period is to monitor the performance of the ICS over a period of time, and not the capital adequacy of IAIGs. For this purpose, the monitoring period is intended to be a period of stability for the reference ICS. This does not preclude possible clarifications, refinements and correction of major flaws or unintended consequences identified during the monitoring period to improve the ongoing development of the ICS.

For this reason, the active participation of IAIGs in the monitoring period is very important to provide effective feedback on the ICS. The feedback received during the monitoring period will be used to further improve the ICS. In addition to the feedback from supervisors, the IAIS will consider feedback from stakeholder engagement, a public consultation and the results of an economic impact assessment, all of which could result in changes to ICS version 2.0.

Solvency II 2020 review: ESRB report on macro-prudential policy for insurance sector

The European Systemic Risk Board (ESRB) has published a report on enhancing macro-prudential policy for the insurance sector. The report has been published to inform the European Commission's ongoing review of the Solvency II Directive.

In line with its strategy for expanding macro-prudential policy beyond banking, the ESRB believes that the review of the Solvency II regulatory regime for insurance in the EU, which is envisaged to be completed by the end of 2020, should result in a revised framework that better reflects macro-prudential considerations, thereby reducing systemic risk in the financial sector.

To deal with systemic risk in the insurance sector, the report considers three types of tool that competent authorities should be able to use:

  • solvency tools for preventing and mitigating procyclical investment behaviour of insurers;
  • liquidity tools for addressing risks stemming from specific activities, such as hedging with derivatives and selling insurance products with redemption features; and
  • tools for addressing risks stemming from the provision of credit to the economy, for example, when insurers originate mortgage loans or invest in corporate bonds, with a view to ensuring consistency in macro-prudential policy across sectors.

Financial Crime

AML/CTF controls in higher risk jurisdictions: HM Treasury updates advisory notice

HM Treasury updated its advisory notice on money laundering and terrorist financing controls in higher risk jurisdictions (AML/CTF). This notice replaces all previous notices issued by HM Treasury on the subject. The revised notice follows from two statements published by the Financial Action Task Force (FATF) on 21 February 2020, identifying jurisdictions with strategic deficiencies in their AML/CTF regimes.

Annex A of the advisory notice identifies the Democratic People's Republic of Korea (DPRK) and Iran as being higher-risk jurisdictions for which enhanced due diligence and appropriate counter-measures ought to be deployed in order to meet the risks presented by each to the international financial system.

Annex B of the advisory notice identifies Albania, The Bahamas, Barbados, Botswana, Cambodia, Ghana, Iceland, Jamaica, Mauritius, Mongolia, Myanmar, Nicaragua, Pakistan, Panama, Syria, Uganda, Yemen and Zimbabwe as countries for which appropriate actions should be taken to minimise the associated risks and these actions may include enhanced due diligence in high-risk situations.

Having been found to have significantly improved its AML/CTF regime, Trinidad and Tobago is no longer subject to the FATF's increased monitoring process and is removed from the list of countries for which enhanced due diligence ought to be considered or applied.

MLD5: FMLC responds to consultation on trusts registration

The Financial Markets Law Committee (FMLC) has published a letter to HM Treasury and HMRC responding to their joint consultation paper on the trusts registration aspects of transposing the Fifth Money Laundering Directive (MLD5). The letter also comments on legal entity identifiers (LEIs) in the context of the expansion of the anti-money laundering regime to cover virtual currencies.

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